Question

Yale Company manufactures hair brushes that sell at wholesale for $3 per unit. The company had no beginning inventory in the prior year. These data summarize the current and prior year operations:

	Prior Year			Current Year
Sales		2,600	units		4,600	units
Production		3,600	units		3,600	units
Production cost
Factory—variable (per unit)	$	0.60		$	0.60
—fixed	$	1,800		$	1,800
Marketing—variable	$	0.40		$	0.40
Administrative—fixed	$	500		$	500

Required:

1. Prepare an income statement for each year based on full costing.

2. Prepare an income statement for each year based on variable costing.

3. Prepare a reconciliation of the difference each year in the operating income resulting from using the full costing method and variable costing method.

Answer 1

Answer:

1.

YALE COMPANY
Full Costing
Income Statement
	Prior Year		Current Year
Sales		7,800		13,800
Less: Cost of goods sold
Beginning Inventory	-		1,100
Cost of goods produced	3,960		3,960
Available for Sale	3,960		5,060
Less: Ending Inventory	1,100		-
Cost of goods sold		2,860		5,060
Gross Margin		4,940		8,740
Less: Selling and administrative costs
Fixed	500		500
Variable	1,040		1,840
		1,540		2,340
Operating Income		3,400		6,400

2.

YALE COMPANY
Variable Costing
Income Statement
	Prior Year		Current Year
Sales		7,800		13,800
Less: Cost of goods sold
Beginning Inventory	-		600
Cost of goods produced	2,160		2,160
Available for Sale	2,160		2,760
Less: Ending Inventory	600		-
Cost of goods sold	1,560		2,760
Add: Variable selling and administrative expenses	1,040		1,840
		2,600		4,600
Contribution Margin		5,200		9,200
Less: Fixed manufacturing costs	1800		1800
Less: Selling and administrative costs
Fixed	500		500
		2,300		2,300
Operating Income		2,900		6,900

3.

YALE COMPANY
Reconciling Difference in Operating Income Between Full and Variable Costing
	Prior Year	Current Year
Change in inventory in units	1,000	(1,000)
x fixed overhead rate	0.50	0.50
Difference in operating income	500	(500)

Calculation:

1.

Here we need to prepare an income statement for each year based on full costing.

For that first we need to find the sales for both years.

Prior Year:

Sales = 2,600 x 3 = 7,800

Current Year:

Sales = 4,600 x 3 = 13,800

Then we need to deduct the Cost of goods produced and ending inventory.

Prior Year:

Cost of goods produced = 1,800 + (3,600 x 0.60) = 3,960

Current Year:

Cost of goods produced = 1,800 + (3,600 x 0.60) = 3,960

Ending Inventory:

Prior Year = 1,000 x 0.60 = 600

Current Year = 0

Then we get the Gross margin. And then we need to deduct the Selling and administrative costs.

The fixed expenses is provided in the question. And then we need to find the Variable expense.

Variable:

Prior Year = 2,600 x 0.40 = 1,040

Current Year = 4,600 x 0.40 = 1,840

After deducting these we get the Operating Income.

2.

Here we need to prepare an income statement for each year based on variable costing.

For that first we need to find the sales for both years.

Prior Year:

Sales = 2,600 x 3 = 7,800

Current Year:

Sales = 4,600 x 3 = 13,800

Then we need to deduct the Available for Sale and ending inventory.

Prior Year:

Available for Sale = (3,600 x 0.60) = 2,160

Current Year:

Available for Sale = 600 (beginning inv) + (3,600 x 0.60) = 2,760

Ending Inventory:

Prior Year = 1,000 x 0.60 = 600

Current Year = 0

Then we need to deduct the Variable selling and administrative expenses to get the Contribution Margin.

Variable selling and administrative expenses:

Prior Year = 2,600 x 0.40 = 1040

Current Year = 4,600 x 0.40 = 1840

Afer that we need to deduct both the fixed manufacturing and the selling expenses to get the Operating Income

3.

Here we need to prepare a reconciliation of the difference each year in the operating income resulting from using the full costing method and variable costing method.

For that first need to find the Change in inventory in units.

Prior Year = 3,600 - 2,600 = 1,000

Current Year = 3,600 - 4,600 = -1,000

And then we need to multiply that with the fixed overhead rate.

Fixed overhead rate = 1,800 / 3,600 = 0.50